Market expectations survey

At the beginning of 2012, the Central Bank of Iceland began conducting quarterly surveys of market agents’ expectations concerning a variety of economic variables such as inflation and interest rates. The last survey was carried out during the period 4-6 May 2015 when a total of 33 agents in the bond market, including banks, pension funds, mutual and investment funds, securities brokers, and licensed asset management firms were invited to participate. Responses were received from 19 market participants, giving a response ratio of 58%.

The results of the May survey indicate that market participants’ short-term inflation expectations have risen markedly since the January survey but that long-term expectations are broadly unchanged. According to the median response, survey participants expect annual inflation to average 1.5% in Q2/2015 and 1.6% in Q3/2015. This is 0.1-0.5 percentage points higher than in the Bank’s January survey. The survey also suggests that respondents’ inflation expectations one year ahead have risen by nearly a percentage point, to 3.5%, whereas their expectations two years ahead were unchanged at 3%. Expectations concerning average inflation over the next five and ten years rose by 0.2 percentage points between surveys, to 3.2%. Moreover, the survey indicates that respondents expect the EURISK exchange rate to be 150 in one year’s time, which is broadly unchanged from the last survey.

According to the median response, market participants expect the Central Bank’s collateralised lending rate to be raised by 0.5 percentage points in the third quarter of 2015 and then raised by another 0.25 percentage points in Q1/2016, to 6%. This is 0.75 percentage points higher than according to the January survey. At the time the survey was conducted, about 60% of respondents considered the monetary stance appropriate. This is a significant increase since January, when 20% of respondents considered the monetary stance appropriate. At the same time, the percentage that considered the monetary stance too tight or far too tight fell by over 45 percentage points, to just under 30%.

In the May survey, market agents were asked what they considered the main cause of the increase in the five- and ten-year breakeven inflation rate in the bond market since late January. Nearly ¾ of respondents indicated that they considered conditions in the labour market to be the main cause of the rise in the breakeven rate.